The Hedged Portfolio Method

Competitive Returns with Less Risk

Limit Your Risk

Maximize Your Returns

Portfolio Armor presents you with a portfolio of optimally hedged securities
constructed to give you the highest expected return possible given your risk
tolerance.

How It Works

You enter the dollar amount you want to invest, and the maximum decline you
are willing to risk over the next six months (your "threshold"). Then,
Portfolio Armor presents you with a concentrated portfolio of securities
built to maximize your expected return over the next six months while
strictly limiting your potential downside to the risk you're willing to take.

Finding Securities With The Highest Potential Returns

There are more than 4,000 hedgeable securities (stocks and exchange traded
products such as ETFs) trading in the U.S. Portfolio Armor calculates
potential returns for each of them every trading day, using an analysis of
historical returns as well as options market sentiment to estimate the
maximum each security will perform over the next six months. From that, we
derive expected returns, which represent more likely returns for each
security.

Find The Ones That Are Also Cheap To Hedge

Since you're going to hedge these securities, you don't just want them to
have high potential returns - the cost of hedging counts too. So we scan for
ones that have the highest potential returns net of hedging costs, the ones
with the highest net potential returns.

Making Sure It Works

Security Selection

We back tested this method of security selection by running our analysis
every trading day over an eleven year period and then looking at the actual
returns of the securities with the highest net potential returns on our daily
scans over the next six months. Over that 11-year period, we conducted 25,412
comparisons of our calculated potential returns to actual returns, an average
of 9.4 top-ranked securities each trading day. The average six month actual
return of our top-ranked securities was 6.84%, versus 4.51% for the leading
S&P 500 index tracking ETF (SPY).

Starting in mid-2017, we began tracking the performance of our top-ranked
names in real time. So far (as of June, 2020), our
top ten names have averaged returns of
5.31%
over 6 months, versus
4.99%
for SPY. You can see the performance of weekly top names cohorts since then
here.

Hedged Portfolio Performance

Testing our security selection method was only a start; we had to test that
our hedged portfolio method worked as a whole, when taking into account
trading costs, hedging costs, and other factors. We backtested our method
from 1/2/2003 to 4/30/2014, a time period which included two bull markets as
well as one of the worst bear markets in generations, the one resulting from
the global financial crisis of 2008-2009. We found that, at certain
thresholds, such as 21% (i.e., for investors willing to risk declines of no
more than 21% over each six month period), our method generated better
returns, net of trading and hedging costs, than the leading S&P 500 index
tracking ETF over the time period, with smaller drawdowns, as the chart above
shows. You can see interactive versions of that and other backtests
here,
along with a complete list of the hedges and underlying positions in each
portfolio.

Starting in mid-2017, we began tracking hedged portfolio performance in real
time - not backtests, but "fronttests", if you will. Some portfolios with
decline thresholds as low as 4% posted market-beating performance, as the
chart below shows. You can find an interactive version of that tracking
portfolio and others
here,
along with a full accounting of the hedges and underlying securities in each
portfolio.

For more on how we select securities and construct hedged portfolios see
here.
For more on our hedging method, see
here.

Although Portfolio Armor is a very sophisticated tool capable of providing useful calculations
it is not designed to replace the advice of a professional investment counselor or your own
independent investment research and independent calculations. To rely solely upon the Portfolio
Armor tool for investment decisions would be extremely unwise.